Sunday, May 22, 2016

Pakistan cuts rate 25 bps, low inflation in '16, higher '17

Pakistan's central bank cut its policy rate by 25 basis points to 5.75 percent, saying inflation is expected to remain low in the current fiscal 2016 year and below the target of 6 percent despite a rising trend in the last seven months.
The State Bank of Pakistan (SBP), which last year cut its rate by 300 basis points, added in a statement from May 21 that inflation in fiscal 2017, which begins July 1, would reach a "higher plateau" as demand was picking up, higher global oil prices will be passed on to consumer prices and higher taxes, electricity and gas tariffs, if realized, would put upward pressure on inflation.
Pakistan's inflation rate rose to 4.17 percent in April from 3.94 percent in March and 1.61 percent in January with core inflation also following a rising trend, "indicating a buildup of underlying inflationary tendencies."
Core inflation eased to 4.4 percent in April from 4.7 percent in March but was up from a recent low of 3.4 percent in October last year.
In April the SBP forecast average inflation in FY16 of 3-4 percent.
Economic growth in Pakistan in the current fiscal year is set to exceed the FY15 growth of 4.2 percent but below the target of 5.5 percent, the SBP said, adding the current account deficit was likely to shrink to the previous year's level of around 1 percent of Gross Domestic Product and foreign exchange reserves were projected to continue to rise.

The State Bank of Pakistan issued the following statement:

"Towards the end of FY16, macroeconomic conditions continue to improve. Headline
CPI inflation, despite its continuous increase on Year-on-Year (YoY) basis, would
remain below its FY16 annual average target of 6 percent. Real GDP growth is set to
exceed its FY15 outcome of 4.2 percent, while remaining below its target of 5.5 percent.
Current account deficit is likely to shrink to the previous year’s level of around 1
percent of GDP and the expected surplus in balance of payments would be marginally
less than the FY15 level. Foreign exchange reserves are still projected to maintain
upward trajectory.
As expected, headline CPI inflation sustained its rising trend for the seventh
consecutive month and on YoY basis rose to 4.2 percent in April 2016 from the low of
1.3 percent in September 2015. In addition to the seasonal impact of perishable food
items and services, this increase owes to further waning of the base effect and second
round impact of decline in oil prices. Similarly, core inflation measures have broadly
followed a rising trend in this fiscal year indicating buildup of underlying inflationary
tendencies. Despite these trends and developments, the inflation outlook for FY16 is
low.
However, going into FY17 inflation is likely to attain a higher plateau.
Major sources that would determine this path are as follows. First, relatively faster
pickup in demand compared to its gradually improving supply dynamics could lead
inflation on a higher side. Second, rising global oil price along with modest recovery in
non-energy commodity prices will pass on to the domestic consumer prices. Third,
some risks, such as imposition of new taxation measures and increase in electricity and
gas tariffs, if realized would put upward pressure on CPI inflation.
Expansion in industrial activities and services sector would salvage some of the lost
momentum to GDP growth due to the losses from cotton and rice crops. Recovery in
Large-scale Manufacturing, which grew by 4.7 percent during Jul-Mar FY16 compared
to 2.8 percent in Jul-Mar FY15, is expected to continue further on account of improving
energy and security conditions. At the same time, buoyant growth in construction and
improved demand for consumer durables has persistently indicated revival in domestic
demand in the current fiscal year. This is also reflected in uptake in credit to private
sector which increased by Rs314.7 billion during Jul-Mar FY16 compared to Rs206.0 billion during the same period of FY15. Thus, GDP growth in FY16 is expected to
provide the needed sustainability in growth trajectory and the basis for further
improvement in FY17.

On the external front, stability in the balance of payments and upward trajectory in
foreign exchange reserves mainly owes to a combination of favorable developments
both in the current and financial accounts. Steady workers’ remittances and low oil
prices have helped contain the current account deficits at manageable levels, while
multilateral and bilateral inflows have largely contributed to the surpluses in the
financial account.
In the current fiscal year as well, favorable trends in these factors are expected to yield
an overall surplus in the balance of payments with SBP’s foreign exchange reserves
estimated to increase to over 4 months of import coverage; up from around 3 months at
end-FY15. Going forward, foreign direct investment is projected to increase as the work
on projects under China Pakistan Economic Corridor gains momentum. On the other
hand, owing to some anticipated uptick in commodity prices along with improvements
in domestic energy supplies exports receipts are likely to recover marginally. However,
with weaknesses in private capital inflows persisting for some time now, uncertainty
may arise if there is an adverse change in oil price or workers’ remittances.
Monetary Policy Committee, after detailed deliberations, has decided to reduce the
policy rate by 25 basis points from 6.0 percent to 5.75 percent."www.CentralBankNews.info